Kroll Sees Supplanting S&P in Rating Commercial Mortgage Bonds

By Zeke Faux -
May 21, 2012

Jules Kroll says his two-year-old
credit ratings firm is poised to surpass Standard & Poor’s
providing grades on bonds backed by commercial mortgages,
capitalizing on a stumble last year by his larger rival.

Kroll Bond Ratings Inc. has focused on grading securities
backed by offices, hotels and shopping malls since S&P was
frozen out of the segment by Wall Street banks after derailing a
$1.5 billion sale by Goldman Sachs Group Inc. and Citigroup Inc.
in July. The firm, which started rating securities backed by
commercial mortgages last year, has 14 percent of the U.S.
market, according to Commercial Mortgage Alert, a newsletter.

“We could very easily replace S&P as the No. 3 rating
agency in that sector,” the 71-year-old risk-consulting
executive whose former firm’s work included probing the hidden
assets of Saddam Hussein’s Iraqi regime in the 1990s said
yesterday in an interview at Bloomberg LP headquarters in New
York. “Looking at the business today versus a year ago when we
hadn’t issued our first rating yet, it’s pretty good progress.”

The company, started after the largest firms assigned top
marks to U.S. subprime-mortgage bonds before that market
collapsed in the credit crisis, will be viable as a business
when it reaches an annual pace of $40 million to $50 million in
revenue, he said in the interview. By the end of the year, Kroll
said, he expects to be halfway there and “cash-flow positive.”

S&P ‘Ineptitude’

“We were helped materially by the ineptitude and the
continued ineptitude of S&P,” Kroll said.

Ed Sweeney, a spokesman for New York-based S&P, the unit of
McGraw-Hill Cos. that’s the largest ratings firm by revenue,
said in an e-mail that “investors value the knowledge and
experience our of analysts in CMBS as well as the many other
asset classes we cover.”

S&P was ranked third globally and Kroll was sixth last year
in rating commercial mortgage bonds, according to Commercial
Mortgage Alert.

S&P hasn’t rated a so-called conduit deal, the biggest part
of the market, since July, according to data compiled by
Bloomberg. On May 16, the firm assigned preliminary ratings to
mortgage bonds backed by a single mall and arranged by JPMorgan
Chase & Co.

Issuance of commercial mortgage bonds may decline this year
as Europe’s sovereign-debt crisis rattles markets, sending
relative yields on the debt last week to the widest this year.
Wells Fargo & Co. forecasts $25 billion of offerings in 2012.
About $28 billion of the securities were issued last year,
Bloomberg data show.

Municipal Debt

Kroll issued its first municipal debt rating in March,
giving Connecticut an AA grade. The mark is Kroll’s third-
highest, matching the level the state receives from S&P and
Fitch Ratings. Moody’s Investors Service rates the state Aa3,
its fourth-highest grade.

“The most important difference is the analytics,” Kroll
told Bloomberg editors and reporters. “I would say the average
report, as opposed to a Moody’s, it may be as much as 30 or 50
percent more content.”

Michael Adler, a spokesman for New York-based Moody’s, the
second-largest ratings firm, declined to comment on Kroll.

In 2010, he purchased Lace Financial as a vehicle to issue
ratings through a Nationally Recognized Statistical Rating
Organization, a designation given by the Securities and Exchange
Commission. Morningstar Inc., billionaire Joe Mansueto’s mutual-
fund data company, also bought a credit-rating business that
year.

After studying the feasibility of having investors pay to
access ratings, Kroll said he decided that the only business
model capable of succeeding would be to charge bond issuers, as
the other ratings firms do.

Kroll also said he made a mistake by initially
concentrating on rating bonds backed by residential mortgages.
Issuance has yet to revive in that market, he said.

“We concentrated on the area where the problem was but
when we went to kick the football, there was no football
there,” Kroll said.